Option

In its simplest explanation a stock option is a contract. The holder of the contract has the option but not the obligation to buy or to sell shares of a stock. A "call" option describes the right to purchase whereas a "put" is the option to sell. The terms of the contract specify a given number of shares and a fixed price.

There are five factors that go into the determination of an option's value. These include stock price, strike price (the agreed upon price for the purchase or sale), the total cost involved in holding a position in the stock including interest and dividends, expiration time, and a future estimate of stock volatility. (The last factor is the most difficult to determine and is largely a matter of experience and intuition on the part of the broker or investor.)

Six United States exchanges list standardized options contracts: the Philadelphia Stock Exchange, the American Stock Exchange, the Pacific Exchange, the Chicago Board of Options Exchange, the International Securities Exchange, and the Boston Options Exchange.

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